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									Chapter 15 - Budgeting and Financial Planning



CHAPTER 15
Budgeting and Financial Planning

ANSWERS TO REVIEW QUESTIONS
15.1    Organization goals are broad-based statements of purpose. Strategic plans take the
        broad-based statements and express them in terms of detailed steps needed to
        attain those goals. Budgets are the short-term plans used to implement the steps
        included in the strategic plans.

        For example, a company may have a goal of "Becoming the number 1 company in
        the industry." The strategic plans would include such statements as: "Increase sales
        volume by 20% per year." The master budget would state the number of units that
        are needed to be produced and sold in the coming period to meet the 20% volume
        increase as well as the production and marketing costs necessary to attain that
        objective. The master budget would also include estimates of the levels of cash,
        accounts receivable, inventories, and fixed assets needed to support the budgeted
        level of activity.

15.2    Operational budgets specify how an organization's operations will be carried out to
        meet the demand for its goods and services. The operational budgets prepared in a
        hospital would include a labor budget showing the number of professional personnel
        of various types required to carry out the hospital's mission, an overhead budget
        listing planned expenditures for such costs as utilities and maintenance, and a cash
        budget showing planned cash receipts and disbursements.

15.3    An example of using the budget to allocate resources in a university is found in the
        area of research funds and grants. Universities typically have a limited amount of
        research-support resources that must be allocated among the various colleges and
        divisions within the university. This allocation process often takes place within the
        context of the budgeting process.

15.4    General economic trends are important in forecasting sales in the airline industry.
        The overall health of the economy is an important factor affecting the extent of
        business travel. In addition, the health of the economy, inflation, and income levels
        affect the extent to which the general public travels by air.




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Chapter 15 - Budgeting and Financial Planning



15.5    Since middle management has better knowledge about operations at lower levels in
        the organization, and since budgets are usually used to evaluate performance or
        compute bonuses for middle management, middle management may have a
        tendency to underestimate revenues and overestimate costs. This bias arises
        because if the biased plans are adopted, middle management will find it easier to
        meet targets and to achieve bonus awards. Of course, if upper management always
        "tightens" the budget plans suggested by middle management, gaming may result.
        The disadvantage of this gaming is that the planning effectiveness may be reduced.

15.6    The budget manual says who is responsible for providing various types of
        information, when the information is required, and what form the information is to
        take. The budget manual also states who should receive each schedule when the
        master budget is complete.

15.7    The budget director, or chief budget officer, specifies the process by which budget
        data will be gathered, collects the information, and prepares the master budget. To
        communicate budget procedures and deadlines to employees throughout the
        organization, the budget director often develops and disseminates a budget manual.

15.8    A master budget is based on many assumptions and predictions of unknown
        parameters. For example, the sales budget is built on an assumption about the
        nature of demand for goods or services. The direct-material budget requires an
        estimate of the direct-material price and the quantity of material required per unit of
        production. Many other assumptions are used throughout the rest of the budgeting
        process.

15.9    A financial-planning model is a set of mathematical relationships that expresses the
        interactions among the various operational, financial, and environmental events that
        determine the overall results of an organization’s activities. A financial-planning
        model is a mathematical expression of all the relationships in the budget. Once the
        financial-planning model is constructed, it can be run many times on a computer
        with different combinations of assumptions and predictions. This process enables
        the budget analyst to see how the budget will appear under a variety of
        circumstances.

15.10 The difference between the revenue or cost projection that a person provides in the
      budgeting process and a realistic estimate of the revenue or cost is called budgetary
      slack. Building budgetary slack into the budget is called padding the budget. A
      significant problem caused by budgetary slack is that the budget ceases to be an
      accurate portrayal of likely future events. Cost estimates are often inflated, and
      revenue estimates are often understated. In this situation, the budget loses its
      effectiveness as a planning tool.




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Chapter 15 - Budgeting and Financial Planning



15.11 An organization can reduce the problem of budgetary slack in several ways. First, it
      can avoid relying on the budget as a negative, evaluative tool. Second, managers
      can be given incentives not only to achieve budgetary projections but also to
      provide accurate projections.

15.12 Under zero-base budgeting, the budget for virtually every activity in the organization
      is initially set to zero. To receive funding during the budgeting process, each activity
      must be justified in terms of its continued usefulness. The zero-base budgeting
      approach forces management to rethink each phase of an organization's operations
      before allocating resources.

15.13 The EOQ approach assumes that some inventory must be held. The objective of the
      model is to balance the cost of ordering against the cost of holding inventory. In
      contrast, the JIT philosophy is to reduce all inventories to the absolute minimum,
      eliminating them completely if possible. The JIT viewpoint asserts that inventory
      holding costs tend to be higher than may be apparent because of the inefficiency
      and waste involved in storing inventory. This view, coupled with the JIT goal of
      reducing ordering costs to very low amounts, results in the desirability of more
      frequent and smaller order quantities.

           In addition, under JIT inventory management, order quantities typically will vary
        depending on requirements. In contrast, under the EOQ model, the order quantity
        remains constant.




ANSWERS TO CRITICAL ANALYSIS


15.14 The flowchart below depicts the components of the master budget for a service
      station.




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Chapter 15 - Budgeting and Financial Planning



15.15 As long as the employees are willing to have all direction come down from above,
      there may be no problem with this executive’s approach. However, employees
      throughout the organization generally are perceived to prefer some input into
      organization decisions. Indeed, managers at lower levels of the organization usually
      have more technical expertise about their specific organization subunit than the
      chief executive officer has. Therefore, inputs from the lower ranks may improve
      organization operations because plans will be based on better information. In
      addition, employees will be more likely to support a plan that they have participated
      in preparing.

15.16 The city could use budgeting for planning purposes in many ways. For example, the
      city's personnel budget would be important in planning for required employees in
      the police and fire departments. The city's capital budget would be used in planning
      for the replacement of the city's vehicles, computers, administrative buildings, and
      traffic control equipment. The city's cash budget would be important in planning for
      cash receipts and disbursements. It is important for any organization, including a
      municipal government, to make sure that it has enough cash on hand to meet its
      cash needs at all times.

15.17 Behavioral studies indicate that when the budget is an upper limit on expenditures,
      employees will have a strong incentive to create budget slack. Thus, in a
      governmental setting, we would expect a strong incentive to overestimate costs to
      provide a cushion for future expenditures.

15.18 Cash receipts and disbursements often take place in different time periods from
      when items are recognized in the income statement and balance sheet. Thus, a
      company needs to prepare a cash budget to ensure that cash needs will be met.

15.19 In developing a budget to meet your college expenses, the primary steps would be to
      project your cash receipts and your cash disbursements. Your cash receipts could
      come from such sources as summer jobs, jobs held during the academic year,
      college funds saved by relatives or friends for your benefit, scholarships, and
      financial aid from your college or university. You would also need to carefully project
      your college expenses. Your expenses would include tuition, room and board, books
      and other academic supplies, transportation, clothing and other personal needs, and
      money for entertainment and miscellaneous expenses.




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Chapter 15 - Budgeting and Financial Planning



15.20 Frequently managers will wait until near the end of the budget period to make
      discretionary expenditures. Sometimes managers will use "excess" funds from one
      period to stock up on supplies and other items that would normally be a part of the
      next budget period’s costs. (Managers have incentives to spend the money
      requested to maintain the credibility of their requests.) These activities are
      sometimes considered detrimental to the organization because they result in a waste
      of resources and improper timing of expenditures. Nonetheless, in many situations
      the cost of controlling these potentially adverse activities exceeds the benefits.

15.21 Firms with international operations face a variety of additional challenges in
      preparing their budgets.

         A multinational firm's budget must reflect the translation of foreign currencies
          into U.S. dollars. Almost all the world's currencies fluctuate in their values
          relative to the dollar, and this fluctuation makes budgeting for those translations
          difficult.

         It is difficult to prepare budgets when inflation is high or unpredictable. Some
          foreign countries have experienced hyperinflation, sometimes with annual
          inflation rates well over 100 percent. Predicting such high inflation rates is
          difficult and complicates a multinational's budgeting process.

         The economies of all countries fluctuate in terms of consumer demand,
          availability of skilled labor, laws affecting commerce, and so forth. Companies
          with foreign operations face the task of anticipating such changing conditions in
          their budgeting processes.

15.22 First there is an incentive for members of various subunits to overestimate costs in
      order to achieve bonus awards. Of course, if the targets are set so tight that they
      cannot be reasonably achieved then there may be a problem for the entire incentive
      system. In addition, there may be a disincentive to increase sales if it means
      increasing costs.
15.23 Since inventories would be eliminated, the timing of purchases would be closer to
      the time of production. This would minimize the differences between the timing of
      cash outflows for materials purchases, work in process and finished goods, and the
      time when the related costs are recognized in the production budget.




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Chapter 15 - Budgeting and Financial Planning




SOLUTIONS TO EXERCISES
15.24 (15 min)       Sales forecasting

Estimate sales revenues for Madison County Bank:

                           Portfolio Amount       Interest Rate      Income
Commercial loans…... $28 million                x 5.5%               $1,540,000
Consumer loans…….. 25 million                   x 8.5%                2,125,000
Securities……………..             6 million         x 6.5%                 390,000
     Total………………                                                     $4,055,000
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE

15.25 (15 min)       Production planning

Estimate production levels for Pandora Pillow Corporation:

                                    PANDORA PILLOW CORPORATION
                                          Production Budget
                                   For the Year Ended December 31
                                               (in units)

Expected Sales…………………………………………………….                               630,000 units
Add: Desired ending inventory
   of finished goods: (2/12 x 630,000)………………………..                 105,000
Total needs…………………………………………………………                                 735,000
Less: Beginning inventory of finished goods……………….                 45,000
Units to be produced …………………………………………….                           690,000 units

Alternative method:

    BB + P = Sales +        EB
45,000 + P = 630,000 + [(2 /12) x (630,000)]

          P = 630,000 + 105,000 – 45,000
            = 690,000 units




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Chapter 15 - Budgeting and Financial Planning




15.26 (15 min)       Sales forecasting

Estimate sales revenues for Ujvari & Company:

 .85 = market volume in the coming year (as a percent of last year)
 .90 = number of trades in the coming year (as a percent of last year)
1.30 = average commission per trade in the coming year (as a percent of last year)
45,000 trades x 210 euros per trade x .85 x .90 x 1.30 = 9,398,025 euros

15.27 (45 min) Internet search of governmental budgets

        Students’ answers on this open-ended internet search of governmental budgets will
        vary widely depending on the governmental unit selected, the year the search is
        done, and their interests. Among the budgetary items that students often find
        interesting are the huge outlays for interest on the national debt in the U.S. federal
        budget, the cost of federal and state entitlement programs, and the rather modest
        salaries of state legislators and city mayors.




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Chapter 15 - Budgeting and Financial Planning



15.28 (25 min)       Estimate production and materials requirements
                                        TECHNOPLAST COMPANY
                                          Production Budget
                                   For the Year Ended December 31
                                               (in units)

Expected sales……………………………………………………………………..                            325,000 units
Add: Desired ending inventory of finished goods…………………………..            35,000
Total needs………………………………………………………………………….                              360,000
Less: Beginning inventory of finished goods………………………………..              80,000
Units to be produced……………………………………………………………...                        280,000 units

                                        TECHNOPLAST COMPANY
                                    Direct Materials Requirements
                                   For the Year Ended December 31
                                               (in units)

Units to be produced ……………………………………………………………… 280,000
Direct materials needed per unit………………………………………………...                     5 feet
Total production needs (amount per unit times 280,000 units)…………… 1,400,000 feet
Add: Desired ending inventory
      (3 months/12 months) x 325,000 x 5 ………………………………….. 406,250

Total direct materials needs……………………………………………………... 1,806,250
Less: Beginning inventory of materials……………………………………….. 200,000
Direct materials to be purchased……………………………………………….. 1,606,250 feet
Alternative method:

Production (assumes finished goods in inventory reduced to 40,000 units at the end of this
year):
    BB + P = Sales + EB
80,000 + P = 325,000 + 35,000
         P = 280,000 units

EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE




                                                15-8
Chapter 15 - Budgeting and Financial Planning


15.28 (continued)

Material requirements:

      BB + P     = Usage + EB
200,000 + P      = (5)(280,000) +           (3/12) (325,000)(5 ft)



P                = 1,400,000 + 406,250 – 200,000

                 = 1,606,250 ft.

15.29 (25 min)       Estimate purchases and cash disbursements

a.
                                        LACKAWANNA PRODUCTS
                                     Merchandise Purchase Budget
                                               (in units)

                                                      February       March
     Estimated sales……………………………….                        8,600          7,000
     Add: Estimated ending inventory…………                 7,000          7,400
     Total merchandise needs…………………...                  15,600         14,400
     Less: Beginning inventory………………….                   8,000          7,000
     Merchandise to be purchased……………..                  7,600          7,400
        Alternative method:

        Purchases are as follows:
     February: BB + P = Sales + EB
               8,000 + P = 8,600 + 7,000
                         = 15,600 – 8,000
                         = 7,600 = February purchases

     March:      7,000 + P = 7,000 + 7,400
                 P         = (7,000 – 7,000) + 7,400
                 P         = 7,400 = March purchases = April sales




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Chapter 15 - Budgeting and Financial Planning



15.29 (continued)

b.      Payments for these purchases are made as follows:
                                                           Month of Delivery
     Month of Payment      Total                January       February       March
     February…………… $2,482,400                   $1,160,000 a  $1,322,400   b

     March……………….           2,169,200                            881,600 c $1,287,600   d

     
     a$1,160,000 = 40% x $290 x 10,000 units.
     b$1,322,400 = 60% x $290 x 7,600 units.
     c$881,600 = 40% x $290 x 7,600 units.
     d$1,287,600 = 60% x $290 x 7,400 units.


15.30 (45 min)       Beyond budgeting

        The opinions of both students and faculty will vary widely on this controversial and
        contemporary topic. The position of beyond budgeting enthusiasts is that traditional
        budgeting processes are so costly and constraining to management performance
        that they should be abandoned and replaced with a radically new management
        model. A more moderate approach suggests that the master budget is still an
        important management tool, but the budgeting process can be improved. Giving
        managers “ownership” of their business units by pushing decision making and
        performance evaluation to more decentralized levels in the organization is a key
        aspect of this new approach.




                                                 15-10
Chapter 15 - Budgeting and Financial Planning



15.31 (25 min)       Estimate purchases and cash disbursements

a.
                                            PARTY TIME, INC.
                                    Merchandise Purchases Budget
                                    For the Period Ended March 31
                                               (in units)

                                              Jan                      Feb      Mar
     Estimated sales…………………………………….. 6,200                            8,900    6,600
     Add: Estimated sales inventory…………………. 15,500                   13,700   11,900
       Total merchandise needs………………………. 21,700                      22,600   18,500
     Less: Beginning inventory……………………….. 14,000                     15,500   13,700
     Merchandise to be purchased…………………… 7,700                        7,100    4,800
     Alternative method:
     January purchases: P =           Sales + EB – BB
                          =           6,200 + (8,900 + 6,600) – 14,000
                          =           7,700 units
     February purchases = 7,100 = April production requirements

     March purchases = 4,800 = May production requirements.

b. Cash required to make purchases:
     January: $5,390 = 7,700 x $.70
     February: $4,970 = 7,100 x $.70
     March:    $3,360 = 4,800 x $.70

EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE




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Chapter 15 - Budgeting and Financial Planning


15.32 (15 min)        Estimate cash collections
        The correct answer is $299,000

                    NEW JERSEY PRODUCE COMPANY
                    Schedule of Cash Collections
                    For the Month Ended July 31
                                                        Month of
                                                         July

From credit sales prior to June………….…………. $ 29,000
From June credit sales……………………………….. 175,000                       a

From July credit sales………………………………… 95,000                         b

Total cash collections………………………………… $299,000

a$175,000 = $250,000 x 70%
b$95,000 = $380,000 x 25%



15.33 (20 min)       Budgeting cash receipts

a.
                                                         Total Sales in January 20x1
                                                          $200,000       $260,000    $320,000
     Cash receipts in January, 20x1
           From December sales on account                 $ 14,250*    $ 14,250     $ 14,250
           From January cash sales                         150,000†     195,000      240,000
           From January sales on account                    40,000**     52,000       64,000
           Total cash receipts                            $204,250     $261,250     $318,250

     *$14,250 = $380,000  .25  .15
     †$150,000 = $200,000  .75

     **$40,000 = $200,000  .25  .80


b.   Operational plans depend on various assumptions. Usually there is uncertainty about
     these assumptions, such as sales demand or inflation rates. Financial planning helps
     management answer "what if" questions about how the budget will look under various
     sets of assumptions.
     EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE




                                                15-12
Chapter 15 - Budgeting and Financial Planning



15.34 (30 min)       Budgeting cash receipts
a. Revenue is as follows:

    January          $16,000    =     5 weddings     x   $3,200
    February         $9,600     =     3 weddings     x   $3,200
    March            $6,400     =     2 weddings     x   $3,200
    April            $12,800    =     4 weddings     x   $3,200
    May              $16,000    =     5 weddings     x   $3,200
    June             $48,000    =    15 weddings     x   $3,200

b. Cash receipts are as follows:

                                          THE WEDDING PLACE
                                       Schedule of Cash Receipts

                                                                                      Total Cash
                               Cash Receipts in Month of:                             Receipts for
                        January    February      March                      April       Period
    January sales……………. $ 4,800 a                                                      $ 4,800

    February sales…………...             4,800     b   $2,880                               7,680

    March sales……………….                1,280     c    3,200        $ 1,920                6,400

    April sales…………………                               2,560          6,400   $ 3,840     12,800

    May sales………………….                                               3,200     8,000     11,200

    June sales………………...                                                       9,600      9,600

      Total cash collections $10,880                $8,640        $11,520   $21,440    $52,480
    
    a$4,800 = 16,000 x 30%
    b$4,800 = $9,600 x 50%
    c$1,280 = $6,400 x 20%


        This pattern is repeated in subsequent months.
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE




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Chapter 15 - Budgeting and Financial Planning



15.35 (30 min)       Budgeting cash receipts
a. Revenues are as follows:

    March        $ 2,500   =     .5 calls x     100 subscribers   x   $50
    April          6,000   =    1.0 call x      120 subscribers   x   $50
    May           23,400   =    1.8 calls x     260 subscribers   x   $50
    June          33,000   =    2.2 calls x     300 subscribers   x   $50
    July          30,000   =    2.0 calls x     300 subscribers   x   $50
    August        23,800   =    1.7 calls x     280 subscribers   x   $50


    Collections of these revenues are expected according to the following schedule:
                                            POOLSIDE, INC.
                                       Schedule of Cash Receipts

                                                                                      Total Cash
                                    Cash Receipts in Month of:                         Receipts
                               May        June         July                 August    for Period
    March sales……………...….... $ 450  a                                                      $450
    April sales…………………….. 3,600 b $ 1,080                                                 4,680
    May sales……………………... 4,680 c         14,040      $ 4,212                            22,932
    June sales…………………….                   6,600       19,800                $ 5,940     32,340
    July sales……………………..                               6,000                 18,000     24,000
    August sales…………………                                                       4,760       4,760
      Total cash collections $8,730     $21,720      $30,012                $28,700    $89,162
    
    a$450 = 18% x $2,500
    b$3,600 = 60% x $6,000
    c$4,680 = 20% x $23,400


    This pattern is repeated in subsequent months.
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE




                                                    15-14
Chapter 15 - Budgeting and Financial Planning



15.36       (25 min)     Prepare budgeted financial statements
a.                                            POOLSIDE, INC.
                                      Budgeted Income Statement
                                      For the Month of September

                                                     Calculations
Revenues…………………………………………….. $17,136 (90% x 280) x (80% x 1.7) x $50
Less service costs:
  Variable costs…………………………………….. 3,398 (.72a x $4,720)
  Maintenance and repair………………………… 4,242 (1.01 x $4,200)
  Depreciation………………………………………. 2,200 (no change)
Total service costs………………………...              $ 9,840
Marketing and administrative:
  Marketing (variable)……………………………... 1,800 (.72a x $2,500)
  Administrative (fixed)…………………………… 2,415 (1.05 x $2,300)
Total marketing and administrative costs…….. $ 4,215
Total costs…………………………………………… $14,055
Operating profit……………………………………... $ 3,081

aRatio of September to August volume:


     September: (90% x 280) x (80% x 1.7) = 342.72
     August: 280 x 1.7 = 476
     Ratio = .72 = 342.72/476
     or
     Ratio = .80 x .90 = .72

EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE




                                                15-15
Chapter 15 - Budgeting and Financial Planning



15.37       (15 min)     Economic order quantity

    a. The EOQ is 600.

                                                 2 x 480,000 x $150
                                        600 =
                                                        $400

    b. The EOQ is 1,200.

                                                  2 x 80,000 x $108
                                       1,200 =
                                                         $12




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Chapter 15 - Budgeting and Financial Planning



15.38 (35 min)        Impact of quantity discounts on order quantity

         First compute the EOQ without regard to the discount schedule:

                                            2AP   2 x 810 x $500
                                    Q* =        
                                             S         $450
                                        = 42

         Then compute the total costs under the initial Q* and for the minimum quantity
         required to earn each of the next price breaks.

 Order               Carrying                    Order         Forgone       Total
Quantity              Cost                       Cost          Discount      Costs

    42               42 x $450             810 x $500         810 x $1,500
                         2                     42             x (6% – 2%)

                      = $9,450                  = $9,643       = $48,600     $67,693

    80               80 x $450             810 x $500         810 x $1,500
                         2                     80             x (6% – 5%)

                     = $18,000                  = $5,063       = $12,150     $35,213
                                                                             Optimal
   150              150 x $450             810 x $500            zero
                         2                    150

                     = $33,750                  = $2,700          -0-        $36,450




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Chapter 15 - Budgeting and Financial Planning



15.39 (20 min)       Impact of constraints on optimal order quantity

        If there were a restriction on the storage capacity, then the optimal order size would
        be 42 units, not the 50 unit restriction. This may be found by comparing the total cost
        at 42 units given in exercise 15.38 as $67,693 with the following costs at 50 units.



               Carrying                 Order              Forgone         Total
                Cost                    Cost               Discount        Costs

               50 x $450             810 x $500           810 x $1,500
                   2                     50                x (6% - 2%)

               = $11,250               = $8,100            = $48,600      $67,950




                                                  15-18
Chapter 15 - Budgeting and Financial Planning



SOLUTIONS TO PROBLEMS
15.40 (30 min)         Budgeted purchases and cash flows

a. The correct answer is $225,000.
                   BB + TI    =    TO + EB
       (130% x 11,900) + TI   =    11,900 + (130% x 11,400)
               15,470 + TI    =    11,900 + 14,820
                        TI    =    11,900 + 14,820 – 15,470
                              =    11,250 units
                 11,250 x $20 =    $225,000
b. The correct answer is $243,600.
                     BB + TI   =     TO + EB
        (130% x 11,400) + TI   =     11,400 + (130% x 12,000)
                 14,820 + TI   =     11,400 + 15,600
                          TI   =     11,400 + 15,600 – 14,820
                               =     12,180 units
                  12,180 x $20 =     $243,600

c. The correct answer is $333,876.
      60% x $363,000* x 97% = $211,266
      25% x $363,000*       =   90,750
      9% x $354,000 †       =   31,860
                              $333,876


*August sales
†   July sales




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Chapter 15 - Budgeting and Financial Planning



15.40 (continued)

d. The correct answer is $285,379
    September purchases paid in October:
       $225,000* x 46% = $103,500
    September selling general and administrative expenses paid in October:
       [($357,000 x 15%) – $2,000] x 46% = $23,713
    October purchases paid in October:
       $243,600** x 54% = $131,544
    October selling, general and administrative expenses paid in October:
       [($342,000 x 15%) – $2,000] x 54% = $26,622
       $103,500 + $23,713 + $131,544 + $26,622 = $285,379

    *From part a. of this problem
    **From part b. of this problem

e. The correct answer is 12,260
                      BB + TI = TO + EB
          (130% x 12,000) + TI = 12,000 + (130% x 12,200)
                            TI = 12,000 + 15,860 –15,600
                               = 12,260 units




                                                15-20
Chapter 15 - Budgeting and Financial Planning



15.41 (25 min)        Production budget
                                      YOLINDA GARDENWARE, INC.
                                          Production Budget
                                   For the Year Ended December 31
                                               (in units)

Expected sales………………………………………………….                         18,000 units
Add: Desired ending inventory of finished goods……….         7,000
Total needs………………………………………………………                           25,000
Less: Beginning inventory of finished goods…………….           4,000
Units to be produced…………………………………………..                     21,000 units

Alternative method:

First, compute the estimated production:

    P = Sales + EB – BB
    P = Sales + (7,000 – 4,000)
      = 18,000 + 3,000
      = 21,000 units

Next estimate the costs:

    Direct materials
        Z-A styrene 21,000 x 1 lb. X $.40……………………….. $ 8,400
        Vasa finish 21,000 x 2 lbs. X $.80 x 1.10……………… 36,960
        Total direct materials ……………………………………. $45,360

    Direct labor:
        21,000 x ¼ hr. x $8.60…………………………………… $45,150

    Overhead:
       Indirect labor………………………. 21,000 x $.09…….. $ 1,890
       Indirect materials…………………. 21,000 x $.05……..  1,050
       Power……………………………….. 21,000 x $.08……..         1,680
       Equipment costs………………….. 20,000 x $.30……..    6,000
       Building occupancy……………… 20,000 x $.25……..    5,000
         Total overhead………………………………………….. $ 15,620
       Total budgeted manufacturing costs…………………. $106,130
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE




                                                15-21
Chapter 15 - Budgeting and Financial Planning



15.42 (40 min)        Budgeted income statement and cash budget

    a. Budgeted income statement

                                            APOLLO PRODUCTS
                                        Budgeted Income Statement
                                            For the Year 20x6

                                                                Calculations

Revenue………………………………………………… $829,540 * $740,000 x 1.18 x .95
Manufacturing costs:
  Materials……………………………………………… 45,595 $42,000 x .92 x 1.18
  Other unit-level (variable) costs ………………… 41,168 $35,600 x .98 x 1.18
  Facility-level (fixed) cash costs……………           85,995 $81,900 x 1.05
  Depreciation (facility-level)……………………….. 230,000 unchanged
Total manufacturing costs…………………………... $402,758
Marketing and administrative costs:
  Marketing (unit-level, cash)………………………. $124,608 $105,600 x 1.18
  Marketing depreciation……………………………. 41,000 unchanged
  Administrative (facility-level, cash)……………… 140,030 $127,300 x 1.10
  Administrative depreciation…………………….... 18,700 unchanged
Total marketing and administrative costs……….. $324,338
Total costs……………………………………………... $727,096
Operating profit……………………………………...... $102,444

*$829,540 = 118,000 units x (.95 x $7.40 per unit)


EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE




                                                15-22
Chapter 15 - Budgeting and Financial Planning


15.42 (continued)

b. Cash budget:

                                         APOLLO PRODUCTS
                              Budgeted Income Statement (Cash Basis)
                                         For the Year 20x6

Revenue………………………………………………… $829,540
Manufacturing costs:
  Materials……………………………………………… 45,595
  Other unit-level (variable) costs…………………. 41,168
  Facility-level (fixed) cash costs………………….. 85,995
Total manufacturing costs…………………………... $172,758
Marketing and administrative costs:
  Marketing (unit-level, cash) ……………………… $124,608
  Administrative (facility-level, cash)…………….. 140,030
Total marketing and administrative costs………... $264,638
Total costs……………………………………………… $437,396
Cash from operations………………………………… $392,144
Cash from operations would equal revenues less cash costs, which excludes depreciation.




                                                15-23
Chapter 15 - Budgeting and Financial Planning



15.43       (60 min)         Preparing operational budget schedules


a.    Sales budget for 20x0:

                                                                                       Units           Price      Total
Small housing .........................................................               60,000            $70     $4,200,000
Large housing .........................................................               40,000            $90      3,600,000
Projected sales .......................................................                                         $7,800,000

b.    Production budget (in units) for 20x0:

                                                                                                   Small         Large
                                                                                                  Housing       Housing
Projected sales ..............................................................................       60,000        40,000
Add: Desired inventories,
  December 31, 20x0 ....................................................................              25,000        9,000
Total requirements.........................................................................           85,000       49,000
Deduct: Expected inventories, January 1, 20x0 ..........................                              20,000        8,000
Production required (units) ...........................................................               65,000       41,000

c.    Raw-material purchases budget (in quantities) for 20x0:


                                                                                                 Raw Material
                                                                                  Sheet             Bar
                                                                                  Metal            Stock         Bases
Small housings (65,000 units projected
   to be produced) .................................................                260,000          130,000             __
Large housings (41,000 units projected
   to be produced) .................................................                205,000          123,000       41,000
Production requirements .......................................                     465,000          253,000       41,000
Add: Desired inventories, December 31, 20x0 .....                                    36,000           32,000        7,000
Total requirements..................................................                501,000          285,000       48,000
Deduct: Expected inventories,
   January 1, 20x0 .................................................                 32,000           29,000        6,000
Purchase requirements (units) ..............................                        469,000          256,000       42,000
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE




                                                                  15-24
Chapter 15 - Budgeting and Financial Planning




15.43 (continued)

d.    Raw-material purchases budget for 20x0:

                                                                             Raw Material   Anticipated
                                                                              Required       Purchase
Raw Material                                                                   (units)         Price        Total
Sheet metal.............................................................       469,000          $8        $3,752,000
Bar stock ................................................................     256,000           5         1,280,000
Bases ......................................................................    42,000           3           126,000

e.      Direct-labor budget for 20x0:

                                                      Projected        Hours
                                                     Production         per           Total                 Total
                                                       (units)          Unit          Hours      Rate       Cost
Small housing ..............................              65,000        2            130,000     $15      $1,950,000
Large housing ..............................              41,000        3            123,000      20       2,460,000
Total ..............................................                                                      $4,410,000




                                                              15-25
Chapter 15 - Budgeting and Financial Planning




f.     Manufacturing overhead budget for 20x0:

                                                                                  Cost            Cost
                                                                                  Driver          Driver    Budgeted
                                                                                 Quantity          Rate       Cost

Purchasing and material handling .......................                     725,000 lb.a          $ .25      $181,250
Depreciation, utilities and inspection ..................                    106,000 housingsb      4.00       424,000
Shipping .................................................................   100,000 housingsc      1.00       100,000
General manufacturing overhead                                               253,000 hr.d           3.00       759,000
Total manufacturing overhead                                                                                $1,464,250

a725,000 = 469,000 + 256,000 (from req. d)
b106,000 = 65,000 + 41,000 (from req. b)
c100,000 = 60,000 + 40,000 (from req. a)
d253,000 = 130,000 + 123,000 (from req. e)



15.44 (25 min)              Sales expense budget
                                                                                              Budgeted:
                  Item                       January                  Adjustments           Typical Month

Sales commissions………… $145,000                             x 1.05 x 1.10                =    $167,475
Sales staff salaries…………. 40,000                           x 1.04                       =      41,600
Telephone & mailing……….. 16,200                            x 1.08 x 1.05                =      18,371
Building lease payment…… 20,000                             none                        =      20,000
Heat, light & water…………..  4,100                           x 1.12                       =       4,592
Packaging & delivery………. 27,400                            x 1.05                       =      28,770
Depreciation…………………. 12,500                                + ($19,000 x .1)             =      14,400
Marketing consultants…….. 19,700                              Increase to $35,000       =      35,000
  Total budgeted costs……                                                                     $330,208




                                                                   15-26
Chapter 15 - Budgeting and Financial Planning



15.45 (40 min)        Ethical issues in budgeting

a.   The use of alternative accounting methods to manipulate reported earnings is unethical
     because it violates the standards of ethical conduct for management accountants. The
     competence standard is violated because of failure to comply with technical standards
     and lack of appropriate analysis. The integrity standard is violated because this action
     induces people to carry out duties unethically due to extreme management pressure,
     subverts the attainment of an organization's objectives, and discredits the profession.
     The objectivity standard is violated because of failure to communicate information fully
     and fairly.



b.   Yes, costs related to revenue should be expensed in the period in which the revenue is
     recognized. Perishable supplies are purchased for use in the current period, will not
     provide benefits in future periods, and should be matched against the revenue
     recognized in the current period. The accounting treatment for the supplies was not in
     accordance with generally accepted accounting principles.



c.   Gary Wood's actions were appropriate. Upon discovering the change in the method of
     accounting for supplies, Wood brought the matter to the attention of his immediate
     superior, Kern. Upon learning of the arrangement with Pristeel, Wood told Kern the
     action was improper and requested that the accounts be corrected and the arrangement
     discontinued. Wood clarified the situation with a qualified and objective peer (advisor)
     before disclosing Kern's arrangement with Pristeel to Delmarva’s division manager,
     Kern's immediate superior. Contact with levels above the immediate superior should be
     initiated only with the superior's knowledge, assuming the superior is not involved. In
     this case, the superior is involved. Thus, Wood has acted appropriately by approaching
     North without Kern's knowledge.




                                                15-27
Chapter 15 - Budgeting and Financial Planning


15.46 (40 min)        Comprehensive budget plan

a. (1)
                                          JAVA TIME, INC.
                                   Production Budget (in units)
                            For October, November, and December 20x0

                                                           October    November      December

    Budgeted sales(in units)………………………………… 120,000                       90,000       120,000
    Inventory required at end of month …………………. 18,000                  24,000        24,000
                                       a

    Total needs………………………………………………… 138,000                             114,000       144,000
    Less inventory on hand at beginning of month……. 24,000              18,000        24,000
    Budgeted production - units…………………………… 114,000                      96,000       120,000
    
    a October:       90,000 x .2 = 18,000
       November: 120,000 x .2 = 24,000
       December: 120,000 x .2 = 24,000

  (2)

                                    Raw Materials Inventory Budget
                                             (in pounds)
                                    For October and November 20x0

                                                                     October     November

         Budgeted production (pounds, at 1/2 lb. per unit)a………        57,000      48,000
         Inventory required at end of monthb…………………………                19,200      24,000
         Total needs……………………………………………………….                            76,200      72,000
         Less inventory on hand at beginning of month……………            22,800      40,800   c

         Minimum amount required to be purchased………………                53,400      31,200
         Budgeted purchases (pounds, based on minimum
         shipments of 25,000 lbs. each)………………………………                   75,000      50,000
         
         aOctober: 114,000 x .5 = 57,000
          November: 96,000 x .5 = 48,000
         bOctober: 96,000 x .5 x .4 = 19,200
          November: 120,000 x .5 x .4 = 24,000
         c22,800 + 75,000 – 57,000 = 40,800
    EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE



                                                15-28
Chapter 15 - Budgeting and Financial Planning


15.46 (continued)

        b.
                                             JAVA TIME, INC.
                                      Projected Income Statement
                                    For the Month of November 20x0

Sales (90,000 units at $2.50)…………………………………………………...                      $225,000
Less: Allowance for uncollectiblesa                                         1,125
Less: Cash discounts on salesb……………………………………………...                          2,239
Net sales…………………………………………………………………………..                                  $221,636

Less: Cost of sales:
  Variable cost per unit
     ($110,000/100,000)         x     90,000 units……………………………… $99,000

  Fixed cost……………………………………………………………………… 10,000                            109,000
Gross margin…………………………………………………………................                       $112,636
Less: Operating expenses:
  Selling (12 percent of gross sales)……………………………………….. $27,000
  Administrative ($41,000 per month)………………………………………. 41,000
  Interest expense (.01 x $100,000)…………………………………………. 1,000                 69,000
Operating profit………………………………………………………………….                               $ 43,636

a$1,125   = $225,000 x .005
b$2,239   = $225,000 x .995 x .01, rounded




                                                15-29
Chapter 15 - Budgeting and Financial Planning




15.47 (40 minutes)         Prepare budgeted financial statements

a. Budgeted income statement:

                                     TRIANGLE ALUMINUM COMPANY
                                     Budgeted Income Statement
                                  For Year Ended December 31, 20x6

                                                               Calculations

Revenue………………………………………………... $973,504                          $820,000 x 1.12 x 1.06
Manufacturing costs:
  Materials……………………………………………… 163,856                          $133,000 x 1.12 x 1.10
  Unit-level (variable) cash costs………………….. 194,504            $180,900 x 1.12 x .96
  Facility-level (fixed) cash costs………………….. 66,960            $72,000 x .93
  Depreciation (facility-level) ………………………. 93,300              $89,000 – $9,700 + $14,000
Total manufacturing costs…………………………… $518,620
Marketing and administrative costs:
  Marketing (unit-level, cash) ……………………… $106,400              $95,000 x 1.12
  Marketing depreciation……………………………. 19,500                    unchanged
  Administrative (facility-level, cash) …………….. 97,319         $90,110 x 1.08
  Administrative depreciation………………………. 13,000                 unchanged
Total marketing and administrative costs………… $236,219
Total costs………………………………………………. $754,839
Operating profit………………………………………… $218,665


EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE




                                                15-30
Chapter 15 - Budgeting and Financial Planning




15.47 (continued)

b. Cash budget:

                  TRIANGLE ALUMINUM COMPANY
            Budgeted Income Statement (Cash Basis)
             For the Year Ended December 31, 20x6
Revenue .....................................................................   $973,504
Manufacturing costs:
  Materials.................................................................     163,856
  Unit-level (variable) cash costs…………………...                                     194,504
  Facility-level (fixed) cash costs…………………..                                      66,960
Total manufacturing costs .......................................               $425,320
Marketing and administrative costs:
  Marketing (unit-level, cash) ……………………….                                       $106,400
  Administrative (facility-level, cash)………………                                     97,319
Total marketing and administrative costs ..............                         $203,719
Total costs .................................................................   $629,039
Cash from operations ...............................................            $344,465

Cash from operations would equal revenues less cash costs, which excludes depreciation.




                                                                   15-31
Chapter 15 - Budgeting and Financial Planning




15.48 (45 min)          Operational budgeting
a.   Production budget:

     Estimated sales for third quarter ........................................            18,000 units
       Less: Beginning inventory ..............................................            (5,000)
       Plus: Ending inventory (80%  7,000) ............................                     5,600
     Production requirements for third quarter .........................                   18,600 units


b.   Material, labor, and overhead budgets:

     (1)
                                                                                     Raw Material
                                                                           B42           F68           M03
            Usage ................................................       108,000         72,000       36,000
            Less: Beginning inventory ..............                      (35,000)      (30,000)     (14,000)
            Plus: Ending inventory ....................                    42,000        28,000       14,000
            Purchases in units ...........................               115,000         70,000       36,000
            Price per unit ....................................          $2.40        $3.60        $1.20
            Cost of purchases ............................              $276,000       $252,000     $ 43,200

     (2)

                                    Units                  DLH per          Total     Cost per        Total
                                  Produced                  Unit*           DLH        DLH            Cost
            Forming.............. 18,000                     .4             7,200       $16         $115,200
            Assembly ........... 18,000                     1.0            18,000        11          198,000
            Finishing ............ 18,000                    .125           2,250        12           27,000
                                                                           27,450 DLH               $340,200

            *DLH denotes direct-labor hours.
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE




                                                                15-32
Chapter 15 - Budgeting and Financial Planning




15.48 (continued)

     (3)    Expected annual production ...............................................        60,000 units
            Actual production through June 30 ....................................            27,000
            Expected production during last six months of the year                            33,000 units
            Unit-level (variable) overhead rate per unit
             ($148,500  27,000 units) ..................................................    $5.50
            Budgeted unit-level (variable) overhead……………………                                 $181,500
            Budgeted facility-level (fixed) overhead*…………………..                                93,000
               Total budgeted overhead ...............................................      $274,500

            *50% of the budgeted annual cost of $186,000.

            This assumes that management believes the annual budget for facility-level
            (fixed) overhead is still valid, and facility-level overhead will be incurred at the
            same budgeted rate (i.e., $93,000 every six months).

                    Two alternative amounts are also reasonable, depending on the
            assumptions one makes: (1) $92,500 (original annual budget of $186,000 minus
            the $93,500 incurred in the first six months), or (2) $93,500, the actual facility-level
            (fixed) overhead incurred in the first six months.




                                                          15-33
Chapter 15 - Budgeting and Financial Planning




15.49 (40 min)               Production and direct-labor budgets; activity-based overhead budget


a.      Production and direct-labor budgets

                                             BUTLER CORPORATION
                                    BUDGET FOR PRODUCTION AND DIRECT LABOR
                                        FOR THE FIRST QUARTER OF 20X1
                                                                                       Month
                                                                           January    February    March       Quarter
Sales (units) .....................................................          10,000      12,000      8,000      30,000
Add: Ending inventory* ...................................                   16,000      12,500     13,500      13,500
Total needs .......................................................          26,000      24,500     21,500      43,500
Deduct: Beginning inventory ..........................                       16,000      16,000     12,500      16,000
Units to be produced .......................................                 10,000       8,500      9,000      27,500
Direct-labor hours per unit ..............................                       1          1        .75
Total hours of direct labor
   time needed .................................................             10,000       8,500      6,750      25,250

Direct-labor costs:
   Wages ($16.00 per DLH)† ............................                    $160,000   $136,000    $108,000    $404,000
   Pension contributions
      ($.50 per DLH) .........................................                5,000       4,250      3,375      12,625
   Workers' compensation
      insurance ($.20 per DLH) ........................                       2,000       1,700      1,350       5,050
   Employee medical insurance
      ($.80 per DLH) .........................................                8,000       6,800      5,400      20,200
   Employer's social security
      (at 7%) ......................................................         11,200      9,520       7,560      28,280
Total direct-labor cost .....................................              $186,200   $158,270    $125,685    $470,155


*100 percent of the first following month's sales plus 50 percent of the second following
month's sales.
†DLH denotes direct-labor hour.




                                                                   15-34
Chapter 15 - Budgeting and Financial Planning


15.49 (continued)

b.    Use of data throughout the master budget:

      Components of the master budget, other than the production budget and the direct-
      labor budget, that would also use the sales data include the following:

       Sales budget

       Cost-of-goods-sold budget

       Selling and administrative expense budget
      Components of the master budget, other than the production budget and the direct-
      labor budget, that would also use the production data include the following:

       Direct-material budget

       Manufacturing-overhead budget

       Cost-of-goods-sold budget
      Components of the master budget, other than the production budget and the direct-
      labor budget, that would also use the direct-labor-hour data include the following:

       Manufacturing-overhead budget (for determining the overhead application rate)

      Components of the master budget, other than the production budget and the direct-
      labor budget, that would also use the direct-labor cost data include the following:

       Manufacturing-overhead budget (for determining the overhead application rate)

       Cost-of-goods-sold budget

       Cash budget

       Budgeted income statement




                                                15-35
Chapter 15 - Budgeting and Financial Planning


15.49 (continued)

c.       Manufacturing overhead budget:

                                             BUTLER CORPORATION
                                       MANUFACTURING OVERHEAD BUDGET
                                        FOR THE FIRST QUARTER OF 20X1

                                                               Month

                                                January      February    March     Quarter

Shipping and handling ...............           $ 25,000     $ 30,000   $20,000   $ 75,000
Purchasing, material handling,
and inspection ............................       30,000       25,500    27,000     82,500
Other overhead ...........................        70,000       59,500    47,250    176,750
Total manufacturing overhead ...                $125,000     $115,000   $94,250   $334,250




                                                     15-36
Chapter 15 - Budgeting and Financial Planning




15.50 (25 min)           Economic order quantity
                                          annual                                    annual 
                                          requiremen 
                                                    t  cost per   order quantity  holding
                                                     
a.     Annual cost of ordering         =  order   order   
                                                                        2
                                                                                     cost per 
                                                                                   
         and storing XL-20                quantity                                            
                                                                                    unit 

                                                                    t)(cost per order)
                                                (2)(annual requiremen
b.    Economic order quantity          =
                                                      annualholdingcost per unit

                                                (2)(4,800)($150)
                                       =
                                                       $4
                                       =        360,000 = 600

c.    Using the formula given for requirement (1):


                    Total annual cost of ordering                   4,800            600 
                          and storing XL-20
                                                              =            $150        $4
                                                                    600              2 
                                                              =    $2,400

      Note that this cost does not include the actual cost of XL-20 purchases (i.e., the
      quantity purchased multiplied by the price).

d.    Orders per year:

                                                                           t
                                                          annualrequiremen 4,800
                  Number of orders per year =                                     8
                                                            order quantity     600

e.    Using the new cost data:

                                                   t)
                             (2) (annual requiremen (cost per order)
      (1)    EOQ =
                                    annual holdingcost per unit

                             (2)(4,800)($20)
                     =
                                 $19.20
                     =       10,000 = 100


                                                      15-37
Chapter 15 - Budgeting and Financial Planning




15.50 (continued)

                                                                                          t
                                                                         annualrequiremen 4,800
      (2)                   Number of orders per year =                                     
                                                                           order quantity     100
                                                                     =   48

15.51 (20 min)          Inventory ordering and holding costs

a.    Tabulation of inventory ordering and holding costs:

                                                                                    Order size
                                                                          400          600           800
      Number of orders
         (4,800 ÷ order size) .................................               12           8               6
      Ordering cost
         ($150  number of orders) .....................                 $1,800      $1,200          $900
      Average inventory
         (order size ÷ 2) ........................................            200       300           400
      Holding costs
         ($4  average inventory) ........................                $800       $1,200         $1,600
      Total annual costs (ordering
         costs + holding costs) ............................             $2,600      $2,400         $2,500

                                                                                    minimum


b.    The tabular method is cumbersome and does not necessarily identify the optimal
      order quantity. An order quantity other than those included in the table may be the
      least-cost order quantity.




                                                            15-38
Chapter 15 - Budgeting and Financial Planning



15.52     (25 min)

Graphical analysis of economic order quantity



        Total annual cost



        $3,500



        $3,000


                                                                          Total annual cost
                                            
        $2,500                                                  
                                                         
Minimum
  cost

        $2,000                                                            Holding costs
                                            
                                                                
        $1,500

                                                         
        $1000
                                                                
                                                                          Ordering costs

          $500



                                                                                Order quantity
                            200            400      600        800      1,000

                                        Economic order quantity (EOQ)




                                                 15-39
Chapter 15 - Budgeting and Financial Planning



15.53 (35 min)

a.    Reorder point:

                                           Monthly usage     =   annualusage
                                                                     12

                                                             =   4,800
                                                                        400 canisters
                                                                  12

                                                Usage during = 400 canisters
                                                   1-month
                                                   lead time

                                           Reorder point     = 400 canisters



      The chemical XL-20 should be ordered in the economic order quantity of 600 canisters
      when the inventory level falls to 400 canisters. In the one month it takes to receive the
      order, those 400 canisters will be used in production.


b.    Safety stock and new reorder point:

      Monthly usage of XL-20 fluctuates between 300 and 500 canisters. Although average
      monthly usage still is 400 canisters, there is the potential for an excess range of 100
      canisters in any particular month. The safety stock of XL-20 is equal to the potential
      excess monthly usage of 100 canisters. With a safety stock of 100 canisters, the
      reorder point is 500 canisters (400 + 100). The materials and parts manager should
      order the EOQ of 600 canisters when the inventory of XL-20 falls to 500 canisters.
      During the one-month lead time, another 300 to 500 canisters of XL-20 will be used in
      production.




                                                     15-40
Chapter 15 - Budgeting and Financial Planning



SOLUTIONS TO CASES
15.54 (120 min)             Comprehensive master budget
a.    Sales budget:

                                                    20x0                                      20x1
                                                                                                                 First
                                                December            January       February       March         Quarter
      Total sales........................        $400,000           $440,000       $484,000     $532,400      $1,456,400
      Cash sales* ......................          100,000            110,000        121,000      133,100         364,100
      Sales on account† ...........               300,000            330,000        363,000      399,300       1,092,300

      *25% of total sales.
      †75% of total sales.


b.    Cash receipts budget:

                                                                                          20x1
                                                                                                                First
                                                                    January       February       March         Quarter
      Cash sales ............................................       $110,000       $121,000     $133,100      $ 364,100
      Cash collections from credit
        sales made during current
        month* ...............................................           33,000      36,300          39,930     109,230
      Cash collections from credit
        sales made during preceding
        month† ...............................................       270,000       297,000       326,700         893,700
      Total cash receipts ...............................           $413,000      $454,300      $499,730      $1,367,030

      *10% of current month's credit sales.
      †90% of previous month's credit sales.




                                                                 15-41
Chapter 15 - Budgeting and Financial Planning




15.54 (continued)

c.    Purchases budget:

                                             20x0                            20x1
                                                                                         First
                                      December        January     February   March      Quarter
      Budgeted cost of
         goods sold..................      $280,000    $308,000   $338,800   $372,680   $1,019,480
      Add: Desired
         ending inventory ........          154,000     169,400    186,340   186,340*     186,340†
      Total goods
         needed ........................   $434,000    $477,400   $525,140   $559,020   $1,205,820
      Less: Expected
         beginning
         inventory.....................     140,000     154,000    169,400    186,340    154,000**
      Purchases ........................   $294,000    $323,400   $355,740   $372,680   $1,051,820

      *Since April's expected sales and cost of goods sold are the same as the projections
      for March, the desired ending inventory for March is the same as that for February.
      †The desired ending inventory for the quarter is equal to the desired ending inventory

      on March 31, 20x1.
      **The beginning inventory for the quarter is equal to the December ending inventory.




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Chapter 15 - Budgeting and Financial Planning




15.54 (continued)

d.    Cash disbursements budget:

                                                                                        20x1
                                                                                                       First
                                                                 January     February      March      Quarter
      Inventory purchases:
      Cash payments for purchases
             during the current month* ........                  $129,360    $142,296     $149,072    $ 420,728
      Cash payments for purchases
             during the preceding
             month† .......................................       176,400     194,040      213,444        583,884
      Total cash payments for
         inventory purchases .......................             $305,760    $336,336     $362,516    $1,004,612

      Other expenses:
         Sales salaries ..................................       $ 19,000    $ 19,000     $ 19,000    $    57,000
         Advertising and promotion ............                    17,500      17,500       17,500         52,500
         Administrative salaries ...................               21,500      21,500       21,500         64,500
         Interest on bonds** .........................             15,000          -0-          -0-        15,000
         Property taxes** ..............................               -0-      5,400           -0-         5,400
         Sales commissions.........................                 4,400       4,840        5,324         14,564

      Total cash payments for other
         expenses .........................................      $ 77,400    $ 68,240     $ 63,324    $ 208,964
      Total cash disbursements ...................               $383,160    $404,576     $425,840    $1,213,576

      *40% of current months' purchases [see requirement (c)].
      †60% of the prior month's purchases [see requirement (c)].

      **Bond interest is paid every six months, on January 31 and July 31. Property taxes also
      are paid every six months, on February 28 and August 31.




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Chapter 15 - Budgeting and Financial Planning




15.54 (continued)

e.    Summary cash budget:

                                                                                                     20x1
                                                                                                                            First
                                                                     January           February             March          Quarter
      Cash receipts [from req. (b)] ...............                  $ 413,000         $ 454,300           $ 499,730      $1,367,030
      Cash disbursements
          [from req. (d)] ..................................          (383,160)         (404,576)          (425,840)     (1,213,576)
      Change in cash balance
          during period due to operations ....                       $ 29,840           $ 49,724             $ 73,890    $ 153,454
      Sale of marketable securities
          (1/2/x1) .............................................           15,000                                             15,000
      Proceeds from bank loan
          (1/2/x1) .............................................        100,000                                              100,000
      Purchase of equipment ........................                  (125,000)                                            (125,000)
      Repayment of bank loan
          (3/31/x1) ...........................................                                            (100,000)       (100,000)
      Interest on bank loan* ..........................                                                      (2,500)         (2,500)
      Payment of dividends ..........................                                                       (50,000)        (50,000)

      Change in cash balance during
        first quarter......................................                                                               $ (9,046)
      Cash balance, 1/1/x1 ............................                                                                     29,000
      Cash balance, 3/31/x1 ..........................                                                                    $ 19,954

      *$100,000  10% per year  1/4 year = $2,500

f.    Analysis of short-term financing needs:

      Projected cash balance as of December 31, 20x0 ......................................                             $ 29,000
      Less: Minimum cash balance .......................................................................                    19,000
      Cash available for equipment purchases ....................................................                       $ 10,000
      Projected proceeds from sale of marketable securities ............................                                    15,000
      Cash available ...............................................................................................    $ 25,000
      Less: Cost of investment in equipment .......................................................                        125,000
      Required short-term borrowing ...................................................................                 $(100,000)




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Chapter 15 - Budgeting and Financial Planning




15.54 (continued)

g.                                                UNIVERSAL ELECTRONICS, INC.
                                                  Budgeted Income Statement
                                                  for the First Quarter of 20x1

      Sales revenue ........................................................................                        $1,456,400
      Less: Cost of goods sold .....................................................                                 1,019,480
      Gross margin .........................................................................                        $ 436,920
      Selling and administrative expenses:
         Sales salaries ...................................................................            $57,000
         Sales commissions..........................................................                    14,564
         Advertising and promotion .............................................                        52,500
         Administrative salaries ....................................................                   64,500
         Depreciation .....................................................................             75,000
         Interest on bonds .............................................................                 7,500
         Interest on short-term bank loan ....................................                           2,500
         Property taxes ..................................................................               2,700
      Total selling and administrative expenses ..........................                                            276,264
      Net income .............................................................................                      $ 160,656

h.                                            UNIVERSAL ELECTRONICS, INC.
                                        Budgeted Statement of Retained Earnings
                                              for the First Quarter of 20x1

      Retained earnings, 12/31/x0 ........................................................................           $ 117,500
      Add: Net income ...........................................................................................      160,656
      Deduct: Dividends ........................................................................................        50,000
      Retained earnings, 3/31/x1 ..........................................................................          $ 228,156




                                                                15-45
Chapter 15 - Budgeting and Financial Planning




15.54 (continued)

i.                                                    UNIVERSAL ELECTRONICS, INC.
                                                       Budgeted Balance Sheet
                                                            March 31, 20x1

     Cash ...............................................................................................................   $   19,954
     Accounts receivable* ....................................................................................                 365,370
     Inventory ........................................................................................................        186,340
     Buildings and equipment (net of accumulated depreciation)† ..................                                             676,000
     Total assets ...................................................................................................       $1,247,664

     Accounts payable** .......................................................................................             $ 223,608
     Bond interest payable ...................................................................................                    5,000
     Property taxes payable .................................................................................                       900
     Bonds payable (10%; due in 20x6) ...............................................................                           300,000
     Common Stock ..............................................................................................                490,000
     Retained earnings .........................................................................................                228,156
     Total liabilities and stockholders' equity .....................................................                       $ 1,247,664

     *Accounts receivable, 12/31/x0 ....................................................................                    $ 276,000
     Sales on account [req. (a)] ............................................................................                1,092,300
     Total cash collections from credit sales
       ($109,230 + $893,700) [req. (b)] .................................................................                   (1,002,930)
     Accounts receivable, 3/31/x1 ........................................................................                  $ 365,370

     †Buildings and equipment (net), 12/31/x0 ....................................................                          $ 626,000
     Cost of equipment acquired .........................................................................                     125,000
     Depreciation expense for first quarter .........................................................                         (75,000)
     Buildings and equipment (net), 3/31/x1 .......................................................                         $ 676,000

     **Accounts payable, 12/31/x0 .......................................................................                   $ 176,400
     Purchases [req. (c)] .......................................................................................            1,051,820
     Cash payments for purchases [req. (d)] ......................................................                          (1,004,612)
     Accounts payable, 3/31/x1 ............................................................................                 $ 223,608




                                                                     15-46
Chapter 15 - Budgeting and Financial Planning



15.55               (40 min) Prepare cash budget for service organization

The income statement is on a cash basis, hence we start with a budgeted income statement.
a.                                                  PHOENIX FITNESS CLUB
                                         Budgeted Statement of Income (Cash Basis)
                                            For the Year Ended October 31, 20x9
Cash revenue
  Lesson and class fees (234/180) x $234,000 .................................................................                         $304,200
 Annual membership fees ($355,000  1.1  1.03)..........................................................                               402,215
 Miscellaneous (2.0/1.5) x $2,000 .....................................................................................                   2,667
    Total cash received .....................................................................................................          $709,082
Cash costs
  Manager’s salary and benefits ($36,000 x 1.15) ............................................................                          $ 41,400
  Lesson and class employee wages and benefits ..........................................................                               291,525
  Regular employees’ wages and benefits ($190,000 x 1.15) ..........................................                                    218,500
  Towels and supplies ($16,000 x 1.25) ............................................................................                      20,000
  Utilities (heat and light) ($22,000 x 1.25) ........................................................................                   27,500
  Mortgage interest ($360,000 x .09) ..................................................................................                  32,400
  Miscellaneous ($2,000 x 1.25) .........................................................................................                 2,500
    Total cash expenses .....................................................................................................          $633,825
Cash income ........................................................................................................................   $ 75,257
Additional cash flows
Cash payments:
  Mortgage payment ...........................................................................................................         $ 30,000
  Accounts payable balance at 10/31/x8 ...........................................................................                        2,500
  Accounts payable on equipment at 10/31/x8 .................................................................                            15,000
  Planned new equipment purchase .................................................................................                       25,000
    Total cash payments ....................................................................................................           $ 72,500

Cash inflows from income statement................................................................................. $ 75,257
Less: Total cash payments                                                                                                     72,500
Beginning cash balance ......................................................................................................  7,300
Cash available for working capital and to acquire property ............................................. $ 10,057




                                                                    15-47
Chapter 15 - Budgeting and Financial Planning




15.55    (continued)



b.                               MEMORANDUM

     Date: Today

     To: Board of Directors, PHOENIX FITNESS CLUB

     From: I. M. Student

     Subject: Comments on Budgeted Income Statement (Cash Basis)

       The accompanying budget indicates that Phoenix Fitness Club could experience
several operational problems in 20x9, including the following:
      The lessons and classes contribution to cash decreased because the projected wage
       increase for lesson and class employees is not made up by the increased volume of
       lessons and classes.
      Operating costs are increasing faster than revenues from membership fees.
      The fitness club seems to have a cash management problem. Although there
       appears to be enough cash generated for the club to meet its obligations, there are
       past due amounts on equipment and regular accounts. Perhaps the cash balance
       may not be large enough for day to day operating purposes.
c. The manager’s concern with regard to the Board’s expansion goals are justified. The
   20x9 budget projections show only a minimal increase in the cash balance. The total
   cash available is well short of the cash needed for the land purchase over and above the
   club’s working capital needs. However, it appears that the new equipment purchases
   can be made on an annual basis. If the Board desires to purchase the adjoining
   property, it is going to have to consider significant increases in fees or other methods of
   financing such as membership bonds, or additional mortgage debt.




FINAL FINAL VERSION



                                                15-48

								
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